Let me start by mentioning Sir Winston Churchill, not for the predictable reason of citing great historical figures in the hope of catching their stardust, but to make two points: one about the poor sense in constraining exchange rates within rigid systems, and another about the way we put our prejudices on to great historical figures.

In 1925, Churchill, as Chancellor of the Exchequer, put Britain back on the Gold Standard, tying the economy to the US rate of $4.86 (Yes, I know, what happened there?). He hoped this would provide stability and help the British economy. After all, the Americans were the future then and their economy was large. Only crazy people would argue against being more closely associated with such a progressive force.

And then along came John Maynard Keynes, the second great historical figure of this note. He thought Churchill was making an error and told him so. It seems he thought shackling exchange rates in this way unduly constrained the economy, in much the same way strict budgetary measures did – and do now.

Today, he is most famous for advocating government spending to stimulate an under-performing economy, because, it is argued, laissez-faire economics often fails to correct the errors the theory says it will correct. And now there are a good number of commentators and politicians who have taken his arguments and refashioned them into a 21st Century version of stimulus to correct the ‘errors’ of free-market economics. If we could just stimulate the economy and increase demand with more government spending then everything will be OK – or at least better than it might otherwise be. Who cares about the debt?

But the effectiveness of stimulus is not the point of this post. What I find interesting is that Keynes not only argued against constraining budgets during recession but also against constraining exchange rates. And there is consistency in this. But the more interesting question is how many of his loudest advocates today reject his second piece of advice yet accept so wholeheartedly his first. Is it because most people don’t know he made this first point? All they know is they want to use government spending to pump up the economy, because that seems to be the consensus of their ‘team’, and they have a great historical figure who appears to support them. Appealing to these Titans is much like appealing to authority in the hope it will lend credence to your argument.

How many people arguing today for stimulus argued yesterday for constraining our exchange rate within the ERM and then the Euro? Quite a few, I’d say. Anyway, I just thought these two points were interesting, and that I’d write them down here.